tag:blogger.com,1999:blog-2830084253401570472.post6137080416275135393..comments2024-03-18T15:42:43.140+13:00Comments on Offsetting Behaviour: More on Housing Affordability: Supply versus DemandEric Cramptonhttp://www.blogger.com/profile/15831696523324469713noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2830084253401570472.post-35713034731114299702012-11-12T13:47:37.021+13:002012-11-12T13:47:37.021+13:00Bruce: On turnover, I am not sure what to think ab...Bruce: On turnover, I am not sure what to think about how low turnover might relate to price changes. I suspect that low turnover is related to price uncertainty due to a combination of risk aversion (people changing houses are reluctant to buy first and sell later in case prices fall, or sell first and buy later in case prices rise) or uncertainty aversion (people entering or leaving a market are reluctant to buy or sell at the current price in case it turns out to be over or under valued). But low turnover implies an equal reduction in demand and supply, and so doesn't have a clear implication for price. <br /><br />The fact that it is really only Auckland and Canterbury that are seeing house price inflation is a strong pointer at the supply story: the ongoing issue with the town belt in Auckland, and the failure to respond to the earthquake by opening up more land for development in Christchurch. <br /><br />Finally, on the Reserve Bank. I have never been comfortable with the idea that house inflation (or asset inflation in general) is something that should exercise a central bank. I guess one could make a case for trying to burst a bubble, but that would require a model that can definitively tell you when you are in a bubble, which is difficult pretty much by definition. But if the asset inflation reflects an underlying trend in fundamentals, such as housing land not keeping pace with population growth, I am at a loss to see what a central bank can or should do about it.Seamus Hogannoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-4081228653798722632012-11-10T15:55:04.556+13:002012-11-10T15:55:04.556+13:00If you look at the data from REINZ and track the n...If you look at the data from REINZ and track the number of sales compared to the number of dwellings (installed base) there has been a major shift in the level of turnover in the market - liquidity, to the extent that it exists in the housing market, has fallen dramatically over the past few years... so where the turnover was about 6% of the installed base from 1992 through to 2008, since then it has fallen to around 3.5%.<br /><br />So another explanation could be that because turnover in the market has been a lot lower than previously, then the problem could be one of delayed demand - in other words, demand that would have been there a couple of years ago wasn't because of the GFC and general uncertainty... <br /><br />So now we have rising demand simply because people have delayed their plans to a later time - and that later time is occurring now - interest rates are low and will be so for some time yet... so the incentive to transact now has risen...<br /><br />Turnover is still quite low, but combined with tight supply (the other side of the turnover issue is that there is still a large group of people who don't want to sell) the result of the sums is rising prices.<br /><br />Also note that it is really only Auckland and Canterbury that are seeing any sustainable increase in prices... so demand is excessive in these two areas but elsewhere supply and demand are more balanced...<br /><br />The policy response is complicated - does the Reserve Bank stamp out house price inflation in Auckland and risk deflation in the rest of the country or does it allow Auckland to see price growth and only start to put the squeeze on when the rest of the country starts to see the same sorts of price pressures??<br /><br />Thoughts?Bruce McKaynoreply@blogger.com